Trading rules for CO2: a proposal for ceilings on quantities and on prices assessment with the POLES

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Trading rules for CO2a proposal for ceilingson
quantities and on prices(assessment with the
POLES model)

• Patrick Criqui - Laurent Viguier IEPE -
  Grenoble

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• The goal is to analyse and quantify, using a
  world long-term energy model, the consequences of
  different trading schemes in the Kyoto context
  ...
• in order to identify a minimum set of rules
  that may be considered as acceptable by the main
  parties to the negotiation
• In this perspective, the introduction of a
   hybrid  system with ceilings on quantities
  (supplementarity) and prices (cost-effectiveness)
  may present interesting properties

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• Introduction the POLES world energy model
• Analysing the impacts of emission trading in the
  framework of the Kyoto agreement
• The potential consequences of  concrete
  ceilings 
• Introducing a  safety valve  in the Kyoto
  context
• Proposal for a hybrid  maximum quantities at
  maximum price  concept

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The POLES 3 model

• A world simulation model for the analysis of
  energy systems and their global environmental
  impacts to 2010 and 2030
• 1. scenarios and projections for energy demand,
  supply and prices
• 2. analysis of CO2 emission reduction options in
  an international perspective
• 3. impacts of technological change and RD
  strategies

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SCOPE A global model for the energy sector

• A full description of the energy systems for 30
  countries / regions (G8 main LDCs)
• 1. Final energy demand, by sector and type of use
  , with income and price-effects
• 2. Diffusion of new and renewable forms of energy
  with ressources and learning curves
• 3. Simulation of electricity production and
  capacities for different power plant categories
• 4. Fossil fuel production (coal, oil, gas) on a
  country by country basis

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POLES 3 The "vertical integration" process
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SCOPE A global model for the energy sector

• "Horizontal integration" through the
  international energy markets and a recursive
  simulation process
• 1. World oil price endogenisation as a function
  of the capacity utilisation rate and world R/P
  ratio
• 2. Regional gas markets and gas trade matrixes
  gas prices as a function of regional R/P ratios
• 3. Three regional coal markets and coal trade
  matrixes, coal price as a function of cost
  componenents in major producers.

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POLES 3 The "horizontal integration" process
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POLES 3 12 Electricity generation technologies
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POLES 3 12 New and Renewable Energy Technologies
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The POLES model Marginal Abatement Cost curves

• The Marginal Abatement Cost curves are produced
  through the introduction in all parts of the
  model of a  shadow carbon tax  or  carbon
  value  with impacts on demand, fuel-mixes and
  technological choices

Emissions e/tC
Target
e/tC
Abatement
Target
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The ASPEN softwarehttp//www.lesphinx-developpeme
nt.fr/ergole/aspen/aspenweb.htm

• The ASPEN software allows for the analysis ad
  quantification of tradable emission permit
  systems
• From the set of Marginal Abatement Costs curves
  produced with POLES (and potentially from other
  models), it allows to calculate the permit price,
  the quantities exchanged and the total costs for
  each trading entity
• The user-friendly environment allows to explore
  different combinations of targets and trading
  rules

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• Introduction the POLES world energy model
• Analysing the impacts of emission trading in the
  framework of the Kyoto agreement
• The potential consequences of  concrete
  ceilings 
• Introducing a  safety valve  in the Kyoto
  context
• Proposal for a hybrid  maximum quantities at
  maximum price  concept

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The introduction of flexibility in the Kyoto
context

• As with other models, the introduction of a
  full-flexibility in the POLES  Reference Kyoto
  constraint  case result in a drastic reductions
  in total and marginal abatement costs
• for the main Annex B countries MACs are brought
  down from 125-210 90/tC to 64 90/tC (permit
  price)
• total cost for Annex B decreases from
  58 billion to 16 billion
• the cost/GDP ratio on a country basis is also
  reduced from 0.15 - 0.4 to 0.1 - 0.27

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The Kyoto  full-trade  case with POLES-ASPEN
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• Introduction the POLES world energy model
• Analysing the impacts of emission trading in the
  framework of the Kyoto agreement
• The potential consequences of  concrete
  ceilings 
• Introducing a  safety valve  in the Kyoto
  context
• Proposal for a hybrid  maximum quantities at
  maximum price  concept

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Analysing trading rules and  concrete ceilings 

• Largely based on the Commissions proposal, five
  types of trading rules have been examined with
  the POLES model
• R1 5 of (Base year Target) / 2
• R2 50 of (max 1994-2002 - Target)
• R3 maximum of R1 or R2 (buyers)
• R4  Concrete ceilings  R3 for buyers, R1 for
  sellers
• R5 R3 only for the EU
• the  however clause  has not been examined
  because of observability issues

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The Kyoto  full-trade  case with POLES-ASPEN
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Supply and demand curves on the permit market
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Gains from trade in the different ceiling rules
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• Introduction the POLES world energy model
• Analysing the impacts of emission trading in the
  framework of the Kyoto agreement
• The potential consequences of  concrete
  ceilings 
• Introducing a  safety valve  in the Kyoto
  context
• Proposal for a hybrid  maximum quantities at
  maximum price  concept

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Hybrid systems  safety valve  and  trigger
price 

• Regulation by prices (rather than by quantities)
  may be prefered when the slope of the MAC curve
  is higher than the slope of the MDC (Weitzman,
  74)
• Authors have thus proposed to combine tradable
  permits with a  safety valve  or  trigger
  price , i.e. a cap on the permit price
  (Mc Kibbin Wilcoxen,
  RFF for US early action)
• This system allows to buy permits either on the
  market or from a  second window , where the
  price of the permit is fixed.
• As a counterpart, the environmental result can no
  more be guaranteed

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Analysis of a trigger price at 20 90/tC

• The advantages in terms of cost limitation of an
  hypothetical price cap are illustrated in the
  case of a 20 90/tC price (25 99) at Annex B
  level
• the economic gain is large with a total cost
  brought down to 8.5 billion 90
• this represents a gain of 50 billion relatively
  to the no-trade case and 7.6 billion relatively
  to the full-trade case

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Analysis of a trigger price at 20 90/tC

• But the environmental effectiveness is
  considerably reduced. In that case
• internal reduction in Annex B importers is about
  17
• this represents 143 Mtc, to which are added 285
  MtC of hot air and 43 Mtc of effective reductions
  in exporters
• as a result, an amount of permits representing
  350 MtC should be bought at the  second window 
• On the whole, Annex B effective reductions
  represent only 53 of the Kyoto target
• This makes the acceptability of this solution
  highly questionable

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Analysis of a trigger price at 20 90/tC
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• Introduction the POLES world energy model
• Analysing the impacts of emission trading in the
  framework of the Kyoto agreement
• The potential consequences of  concrete
  ceilings 
• Introducing a  safety valve  in the Kyoto
  context
• Proposal for a hybrid  maximum quantities at
  maximum price  concept

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An hybrid system with ceilings on quantities and
prices

• Taking into account
• the supplementarity principle
• the need to limit both the costs of the abatement
  programs and the uncertainty surrounding the
  future permit price
• the advantages / drawbacks of the different
  regulation systems examined up to now
• it appears that an hybrid system combining
  ceilings on quantities imported (but not
  exported) and a maximum price may present
  interesting properties

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An hybrid system with ceilings on quantities and
prices

• To examine this case we supposed that R2 (50 )
  was applied only to permit importers and that a
   second window  was created for permits at
  20 90/tC (MQMP case)
• The basic result of this exercise is a
  dissociation of the national carbon values and of
  the international permit price
• the formers correspond to the MACs necessary to
  meet the ceilings (they are brought down from
  160 - 210 /tC in the no-trade to 80 - 120 /tC
  in the MQMP case
• the latter will in any case be inferior to 20
  90/tC

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Maximum Quantities at Maximum Price
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Maximum Quantities at Maximum Price
Total cost No-Trade 58 b Full-Trade 16
b MQMP 22 b
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Conclusions - 1

• The hybrid MQMP system is only one possibility
  among many others in the search for new solutions
  for trading and compliance rules
• Basically, it however responds to some key
  concerns in the Kyoto Protocol implementation
• it provides internal price signals high enough to
  induce change towards low carbon solutions
• limits the cost of the programs
• and reduces the uncertainty on international
  permit prices
• Furthermore, its impacts in terms of
  international distribution may be less unbalanced
  than those of the other solutions

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Conclusions - 2

• Among derived issues yet to be explored, one can
  identify
• the impact of the  second window  on the price
  of the market transactions (particularly as
  concerns the hot-air, which may be sufficient to
  cover the remaining demand)
• the volume of permits sold at the second window
  (which may fuel an adaptation fund for developing
  countries vulnerable to climate change)
• the transition from this system in the first
  compliance periods towards a more global and less
  regulated world permit market in the post-Kyoto
  perspective